If you have examined one of my stock analyses, you may have noticed the metric "Rolling 4-yr Div. > 15%". This calculation determines if a company's dividends grew on average in excess of 15% for each consecutive 4-year period, within the last 10 years of history.
For example, if on average dividends grew 15% or more for the periods 2018-2021 and 2017-2020 and 2016-2019 and so on to 2010-2013, then this test is true. The reason I like this metric is it identifies companies that consistently increase dividends significantly. Another way of stating this is that if you held this company for any 4-year period over the last 10 years, you would have averaged a 15% dividend growth rate during the time you held the stock.
Contrast the above example with a company that grew its dividends at 1% per year for nine years, then sold some land in year 10 and paid a special dividend that resulted in a 140% year-over-year dividend increase. This company's average 10-year dividend growth rate is 15% [(140 + 9)/10].
Both companies would have a 15% 10-year average dividend growth rate. However, based on history the first company is more likely to raise its dividend by 15% in the future.
So why is 15% relevant? Dividends will double every 5 years if they grow by 15% per year (5/15). Taking this undeniable math principle into consideration, it often makes sense to purchase a stock with a lower yield but with a higher growth rate. Here are few companies that have the power of 5/15 working for them:
Amgen Inc. (AMGN) is one of the world's leading biotech companies with major treatments for anemia, neutropenia, rheumatoid and psoriatic arthritis, psoriasis, cancer and osteoporosis. Yield: 3.4%
Illinois Tool Works Inc. (ITW) is a diversified manufacturer that operates a portfolio of 60 business units that serve industrial and consumer markets globally. Yield: 2.3%
Abbvie Inc. (ABBV) is a global research-based pharmaceuticals business that emerged as a separate entity following its spin-off from Abbott Laboratories at the start of 2013. AbbVie's key drug is Humira for rheumatoid arthritis. Yield: 4.7%
Lowe's Companies, Inc. (LOW) retail building materials and supplies, lumber, hardware and appliances through more than 1,850 stores in the U.S. and Canada. Yield: 1.6%
Texas Instruments Inc. (TXN) of the world's largest manufacturers of semiconductors, this company also produces scientific calculator products and DLP products for TVs and video projectors. Yield: 2.4%
If you have time on your side, you should investigate if certain lower yielding stocks with a dividend growth rate fits into your long-term investment strategy. When making this evaluation, it is important to note that the sustainability of the dividend growth rate must be evaluated on a go-forward basis. Like high-yield stocks, there is increasing risk as the dividend growth rises.
Full Disclosure: Long ITW, ABBV, TXN,
Related Articles
Illinois Tool Works Inc. (ITW) is a diversified manufacturer that operates a portfolio of 60 business units that serve industrial and consumer markets globally. Yield: 2.3%
Abbvie Inc. (ABBV) is a global research-based pharmaceuticals business that emerged as a separate entity following its spin-off from Abbott Laboratories at the start of 2013. AbbVie's key drug is Humira for rheumatoid arthritis. Yield: 4.7%
Lowe's Companies, Inc. (LOW) retail building materials and supplies, lumber, hardware and appliances through more than 1,850 stores in the U.S. and Canada. Yield: 1.6%
Texas Instruments Inc. (TXN) of the world's largest manufacturers of semiconductors, this company also produces scientific calculator products and DLP products for TVs and video projectors. Yield: 2.4%
If you have time on your side, you should investigate if certain lower yielding stocks with a dividend growth rate fits into your long-term investment strategy. When making this evaluation, it is important to note that the sustainability of the dividend growth rate must be evaluated on a go-forward basis. Like high-yield stocks, there is increasing risk as the dividend growth rises.
Full Disclosure: Long ITW, ABBV, TXN,
Related Articles
- 5 Stocks Currently Trading Below their Fair Value
- The Perfect Dividend Stock
- Early Warning Signs of a Dividend Cut
- The Best Dividend Stocks In The World
- The Perfect Dividend Stock
- Early Warning Signs of a Dividend Cut
- The Best Dividend Stocks In The World
